BUS-530, ECONOMIC CONDITIONS

ANALYSIS

COURSE TEACHER:
D R . TA M G I D A H M E D C H O W D H U R Y
A S S O C I AT E P R O F E S S O R , S B E
ADMINISTRATIVE ISSUES

• About the course

• Learning outcomes and expectations
• Books and references
• Evaluation procedure and grading issues
• About the research report
• Course contents
INTRODUCTION TO MACROECONOMICS
• Definition
Macroeconomics is the study of the economy as a whole, including growth in
incomes, changes in prices, and the rate of unemployment (Mankiw, 2012; 8th
Edition; pp. 13).
Macroeconomics can help to address the following:
• Why does the cost of living keep rising?
• Why are so many countries poor? What policies might help them grow out of
poverty?
• What is the trade deficit? How does it affect the country’s well-being?
INTRODUCTION TO MACROECONOMICS
• Differences between micro and macroeconomics
Microeconomics
Explains the behavior of individual units of
a society such as, a person or a firm
Usually measures the change in one
variable (endogenous) with respect to
another by considering all other variables
(exogenous) as constant.
Such as, Qd = 60 -10P
Key concepts: Demand, supply, consumer
behavior, producer behavior
Macroeconomics
Describes the behavior of the whole
economy (within and outside the country)
Capture effect in one variable (endogenous)
when many other related variables
(exogenous) change.
Such as, Qd = 60 -10P + 2Y
Key concepts: National income, GDP,
inflation, unemployment rate, economic
growth, monetary and fiscal policy, trade.
INTRODUCTION TO MACROECONOMICS
• Diagrammatic difference between micro and macroeconomics: Transition

Microeconomics Macroeconomics
PRICES: FLEXIBLE VS. STICKY
• The economy’s behavior depends partly on whether prices are sticky or
flexible:
– If prices sticky (short run),
demand may not equal supply, which explains:
• unemployment (excess supply of labor)
• why firms cannot always sell all the goods
they produce
– If prices flexible (long run), markets clear and economy behaves very
differently
What macroeconomic issues have been in the news recently? Can you
name few of them?

• Bangladesh Government implemented new pay scale

• Changes in the share prices in the stock market
• Effects of BREXIT on Bangladesh Economy
• Bangladesh Bank supplies new notes before Eid
• John Kerry’s visit to Bangladesh and request of Commerce Minister
for quota free entry in USA
• Vegetable market is on fire due to flood.
CHAPTER-2: THE DATA OF MACROECONOMICS
KEY ISSUES
Students will learn about the meaning and measurement of the
most important macroeconomic statistics:
– Gross Domestic Product (GDP)
– Circular flow of national income
– The Consumer Price Index (CPI)
– The unemployment rate
GROSS DOMESTIC PRODUCT (GDP)
• GDP is the market value of all final goods and services produced within the
country in a given period of time.
GDP of Bangladesh = (Market Price of Rice × Quantity of Rice) +
(Market Price of Wheat × Quantity of Wheat)
= (50 Taka × 100) + (20 Taka × 50) = 6000 Taka.
Two other definitions:
– Total expenditure on domestically-produced final goods and services.
– Total income earned by domestically-located factors of production.
THE CIRCULAR FLOW
Income ($)

Labor

Households Firms

Goods

Expenditure
($)
CAUTIONS ABOUT COMPUTING GDP
• Value of used goods should not be included in the GDP calculation. You are
buying a second hand car by paying 5 Lacs Taka. The actual value of the brand
new car was 20 Lacs. If you add the value of second hand car, the total value of
the car will be 20 + 5 = 25 Lacks. This is overestimation.
• Value of inventory should be added and will be considered as ‘Investment’.
• Intermediate goods and their value addition should not be added in the
calculation. This will create Double Counting of GDP (refer to next slide).
• Value of Housing services are hard to compute and add in the GDP.
• Value of goods traded in underground economy can’t be measured and added.
VALUE ADDED
• A firm’s value added is the value of its output minus the value of the intermediate
goods
the firm used to produce that output.
– A farmer grows a bushel of wheat
and sells it to a miller for $1.00.
– The miller turns the wheat into flour
and sells it to a baker for $3.00.
– The baker uses the flour to make a loaf of
bread and sells it to an engineer for $6.00.
– The engineer eats the bread.
Compute & compare value added at each stage of production and GDP
NOMINAL GDP VS REAL GDP
• Nominal GDP is the value of goods and services produced during a given year valued at the
prices that prevailed in that same year. This is also referred to as ‘money GDP.
• Real GDP: Value of Goods and services produced in a year measured using a ‘base year’ or
constant price.
• Important note: In nominal GDP, price and quantity both change in different years. But in real
GDP, quantity changes in different years but price remains same (price of base year called
constant price)
Try this example to distinguish between them:
Year QuantityNominal
Mkt.GDP 2015: 100 × 500 = 500
Price
2015 100 Nominal GDP5 2014: 80 × 4 = 320
2014 80 GDP growth 4 rate = 56.25% (really !!!!!!)
Now assume that constant price is 3 Taka. Real GDP 2015 = 300 and Real GDP 2014 = 240
Real GDP growth rate = 25%
REAL VS NOMINAL GDP: CASE BANGLADESH
  2010-11 2011-12 2012-13 2013-14 2014-15
Nominal GDP 915 1055 1198 1343 1515
Real GDP 646 688 729 774 824
  2010-11 2011-12 2012-13 2013-14 2014-15
Growth Nominal GDP   15.30 13.55 12.10 12.81
Growth Real GDP   6.50 5.96 6.17 6.46

Trend of GDP (Nom vs Real) GDP Growth trend

1600 18.00
1400 16.00
1200 14.00
12.00
1000
10.00
800
8.00
600
6.00
400 4.00
200 2.00
0 0.00
2010-11 2011-12 2012-13 2013-14 2014-15 2010-11 2011-12 2012-13 2013-14 2014-15

Nominal GDP Real GDP Growth Nominal GDP Growth Real GDP
PRACTICE PROBLEM

2006 2007 2008

P Q P Q P Q

good A $30 900 $31 1,000 $36 1,050

good B $100 192 $102 200 $100 205

• Compute nominal GDP in each year.

• Compute real GDP in each year using 2006 as the base year.
ANSWER TO THE PROBLEM
Nominal GDP (multiply Ps & Qs from same year)
2006: $46,200 = $30  900 + $100  192
2007: $51,400
2008: $58,300

Real GDP (multiply each year’s Qs by 2006 Ps)

2006: $46,200
2007: $50,000
2008: $52,000 = $30  1050 + $100  205
GDP DEFLATOR AND INFLATION/DEFLATION
• The inflation (deflation) rate is the percentage increase (decrease) in the
overall level of prices.
• GDP deflator shows what is happening to the overall level of prices in the
economy.
• One measure of the price level is the GDP deflator, defined as

Nominal GDP
GDP deflator = 100 
Real GDP
PRACTICE PROBLEM (CONTINUES…)
GDP Inflation
Nom. GDP Real GDP
deflator rate

2006 $46,200 $46,200 n.a.

2007 51,400 50,000

2008 58,300 52,000

Use your previous answers to compute the GDP deflator in each year.
Use GDP deflator to compute the inflation rate from 2006 to 2007, and
from 2007 to 2008.
ANSWER TO THE PROBLEM

Nominal GDP Inflation

Real GDP
GDP deflator rate

2006 $46,200 $46,200 100.0 n.a.

2007 51,400 50,000 102.8 2.8%

2008 58,300 52,000 112.1 9.1%

 USE OF GDP FOR PERFORMANCE COMPARISON
AMONG COUNTRIES

Economic Growth Rates Economic Growth Rates

8
8
7 7
6 6
5
5
4
4 3
2012 2013 2014 2015 2016 2017
3
2012 2013 2014 2015 2016 2017 Bangladesh South Asia
Developing Countries
Bangladesh India Pakistan
PROBLEM WITH REAL GDP METHOD AND
USE OF CHAIN-WEIGHTED METHOD
– Using a base-year-constant-prices approach to estimating real GDP has
some problems – notably that the choice of base year strongly influences
the results if relative prices change. Switching base year from 1970 to
1980 changed real GDP and growth markedly for oil-producers, for
example.

– The new method of calculating real GDP, which is called the chain-
weighted output index method, uses the prices of each pair of adjacent
years to calculate the real GDP growth rate, so no one year’s prices matter
more than any other year’s.
CHAIN-WEIGHTED MEASURE OF REAL GDP

– Step 1: Value last year’s production and this year’s production at last year’s
prices and then calculate the growth rate of this number from last year to
this year. (in short: Real GDP by taking last year as base year)
– Step 2: Value last year’s production and this year’s production at this year’s
prices and then calculate the growth rate of this number from last year to
this year. (in short: Real GDP by taking this year as base year)
– Step 3: Calculate the average of the two growth rates. This average growth
rate is the estimate of the growth rate of real GDP from last year to this
year.
– Step 4: Repeat steps 1, 2, and 3 for each pair of adjacent years to link real
GDP back to the base year.
PRACTICE EXAMPLE
2006 2007 2008
P Q P Q P Q
good A $30 900 $31 1,000 $36 1,050

good B $100 192 $102 200 $100 205

• Step-1: Real GDP of 2008 at 2007 constant price is: (1050 × 31) + (205 × 102) = 53460
Real GDP of 2007 at 2007 constant price is: (1000 × 31) + (200 × 102) = 51400
GDP growth rate = 4.00
• Step-2: Real GDP of 2008 at 2008 constant price is: (1050 × 36) + (205 × 100) = 58300
Real GDP of 2007 at 2008 constant price is: (1000 × 36) + (200 × 100) = 56000
GDP growth rate = 4.10
• Step-3: Average growth rate = 4.05
PRACTICE PROBLEM
Item Quantity Price
• Assume 2011 is the base
year. Calculate real GDP in 2011
2013 using the Apple 100 $1.00
Rice 20 $5.00
1. Base year prices method 2012
2. Chain-weighted output Apple 160 $0.50
index method Rice 22 $22.50
• Round up/down all figures 2013
up to 2 decimal points.
Apple 180 $1.50
Rice 25 $26.00
NATIONAL INCOME IDENTITY: GDP
CALCULATION BY EXPENDITURE METHOD

Y = C + I + G + NX

aggregate
value of expenditure
total output
COMPONENTS OF EXPENDITURE METHOD

• Consumption (C): The value of all goods and services bought by households. Includes:
durable goods last a long time ex: cars, home appliances ; nondurable goods last a short
time ex: food, clothing; services work done for consumers ex: dry cleaning, air travel.
• Investment (I): Spending on [the factor of production] capital or Spending on goods
bought for future use includes: business fixed investment such as Spending on plant and
equipment that firms will use to produce other goods & services; residential fixed
investment such as Spending on housing units by consumers and landlords; inventory
investment such as the change in the value of all firms’ inventories.
• Government expenditure (G): includes all government spending on goods and
services.. excludes transfer payments (e.g., unemployment insurance payments), because
they do not represent spending on goods and services.
• Net export (NX): The value of total exports (EX) minus the value of total imports (IM).
GDP CALCULATION IN EXPENDITURE
METHOD: CASE BANGLADESH
OTHER MEASURES OF INCOME
• Gross National Product (GNP): GNP measures the total income earned by nationals (residents
of a nation) of a country.
GNP = GDP + Net Factor Income (NFI)
NFI = Factor payment from abroad – Factors payment to abroad
GNP = GDP + (Factor payment from abroad – Factors payment to abroad)
An example: Assume GDP of Bangladesh is 100. A Bangladeshi resident owns an apartment in
Sydney. Rental value of that apartment is 10.
In this case: 10 rental value is included in the GDP of Australia. But as this 10 is factor payment to
Bangladesh, this 10 is added in our GNP as Factor payment from abroad but the same 10 will be
deducted from GNP of Australia as factor payment to Bangladesh.
Net National Product (NNP): NNP is measured by subtracting depreciation (the amount that
wears out during a year from structures, equipment, and so on) from GNP. Thus,
NNP = GNP- Deprecation
DISCUSSION QUESTIONS
1. In your country, which would you want to be bigger, GDP, or GNP? Why?
2. Consider whether each of the following events is likely to increase or
decrease real GDP. Do you think economic wellbeing will change in the
same direction like real GDP? Why or why not:
a) A flood in Bangladesh affects the production of agricultural crops negatively.
b) Labor unrest in RMG sector caused strike for a week.
c) Bangladesh Government reduces the price of lubricants.
d) Bangladesh Government reduces the minimum taxable income to 150, 000
Taka which was initially 250,000 Taka.
CONSUMER PRICE INDEX (CPI):
MEASURING THE COST OF LIVING
• A measure of the overall level of prices (Published by the BBS)
• Uses:
– tracks changes in the typical household’s cost of living
– adjusts many contracts for inflation (“COLAs”)
– allows comparisons of Taka amounts over time
How do they calculate CPI
-- Survey consumers to determine composition of the typical consumer’s “basket” of goods.
-- Every month, collect data on prices of all items in the basket; compute cost of basket
-- CPI in any month equals: Cost of basket in that month
100 
Cost of basket in base period
 CPI CALCULATION • Assume base year is 2006
• Cost of the basket in 2008 MP = (1050
× 36) + (205 × 100) = 58300
• Cost of the basket in 2007 MP= (1050
× 31) + (205 ×102) = 53460
2006 2007 2008 Similarly,
P Q P Q P Q • Cost of the basket in 2006 MP = (1050
good A $30 $31 $36 1,050 × 30) + (205 × 100) = 52000
CPI for 2007 = (53460/5200) * 100
good B $100 $102 $100 205
=102.80
CPI for 2008 = (58300/52000) * 100
=112.1

NOTE: You must keep the basket same

HOW ARE GDP DEFLATOR AND CPI DIFFERENT
• Differences in the quantity of goods: GDP deflator measures the prices of all goods and
services whereas CPI measures only the basket consumed by the people.
• Non-production: CPI considers the value of a product even if that is no longer produced in the
next period. GDP deflator considers only those products produced currently.
• Substitution bias: The CPI uses fixed weights, so it cannot reflect consumers’ ability to
substitute toward goods whose relative prices have fallen.
• Introduction of new goods: The introduction of new goods makes consumers better off and,
in effect, increases the real value of the dollar. But it does not reduce the CPI, because the CPI
uses fixed weights.
• Unmeasured changes in quality:
Quality improvements increase the value of the dollar, but are often not fully measured.
• Conclusion: CPI overestimates inflation.
COMPARING GDP DEFLATOR AND CPI
2006 2007 2008
P Q P Q P Q
good A $30 900 $31 1,000 $36 1,050

good B $100 192 $102 200 $100 205

Nominal Real GDP Inflation Cost of basket (1050 Inflation

GDP GDP deflator rate CPI
unit of A & 205 unit of B) rate
2006 $46,200 $46,200 100.0 n.a. 2006 $52,000 100.0 n.a.
2007 51,400 50,000 102.8 2.8% 2007 53,460 102.8 2.8%
2008 58,300 52,000 112.1 9.3% 2008 58,300 112.1 12.1%
INFLATION RATE IN BANGLADESH
• A moderate inflation is
always good for the economy
as it encourages more
production and thus
economic growth.
• Fluctuating inflation is
harmful in the sense that it is
confusing for the producers.
• Deflation is harmful for the
society as it impedes
economic growth and may
results to recession and
depression.
• Current rate of inflation in
Bangladesh is 6.2%
(BBS,2015)
PRACTICE PROBLEMS
• Currently, on an average, price of one KG fine rice is 50 Taka in
Bangladesh. Our history says that a consumer could buy 40 Kgs of
rice with One Taka only in the regime of Shayesta Khan. Find the
rate of inflation on rice market by using the concepts of CPI.
• You are living in Dhaka and your friend is living in Chittagong. Both
of you require 10 KGs of rice per month. In Dhaka and Chittagong
prices of Basmati rice are 50 Taka and 45 Taka respectively.
Calculate CPI for you with respect to your friend. Comment on the
result.
LABOR FORCE AND RATE OF UNEMPLOYMENT
• Employed: working at a paid job
• Unemployed: not employed but looking for a job
• labor force: the amount of labor available for producing goods and services; all
employed plus unemployed persons.
Labor force = Number of employed + number of unemployed
• not in the labor force: not employed, not looking for work
• unemployment rate: percentage of the labor force that is unemployed.
Unemployment rate = (Number of unemployed/Labor force) * 100
• labor force participation rate: the fraction of the adult population that “participates”
in the labor force.
Participation rate = (Labor force/Adult population) * 100
PRACTICE PROBLEM
In a country adult population by group, June 2016 (hypothetical)
Number employed = 144.4 million
Number unemployed = 7.0 million
Adult population = 228.8 million

Use the above data to calculate

– the labor force
– the number of people not in the labor force
– the labor force participation rate
– the unemployment rate
ANSWER TO THE PROBLEM
• data: E = 144.4, U = 7.0, POP = 228.8
• labor force
L = E +U = 144.4 + 7 = 151.4
• not in labor force
NILF = POP – L = 228.8 – 151.4 = 77.4
• labor force participation rate
L/POP x 100% = (151.4/228.8) x 100% = 66.2%
• unemployment rate
U/L x 100% = (7/151.4) x 100% = 4.6%
UNEMPLOYMENT RATE: BANGLADESH CASE
(SOURCE: BBS, 2015)